Consider the following information Rate of Return if State Occurs State of Econo

Question

Consider the following information Rate of Return if State Occurs State of Economy Recession Normal Boom Probability of State of Economy 0.20 0.70 0.10 Stock A 0.02 0.09 0.13 Stock B 0.21 0.15 0.33 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) Click to select) v (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) Click to select) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) Click to select) (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.) Click to select) v

Explanation / Answer

Expected return=Respective return*Respective probability

Expected return for A=(0.2*0.02)+(0.7*0.09)+(0.1*0.13)

=8%(or 0.08)

Standard deviation for A=[Total Probability*(Return-Mean)^2/Total Probability]^(1/2)
=3.22%(Approx)(or 0.0322)

Expected return for B=(0.2*-0.21)+(0.7*0.15)+(0.1*0.33)

=9.6%(or 0.096)

Standard deviation for B=[Total Probability*(Return-Mean)^2/Total Probability]^(1/2)
=16.2%(Approx)(or 0.162)

Probability Return Probability*(Return-Mean)^2 0.2 2 0.2*(2-8)^2=7.2 0.7 9 0.7*(9-8)^2=0.7 0.1 13 0.1*(13-8)^2=2.5 Total=10.4%

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